Pros And Cons Of Owner Financing

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Find out the possible advantages and disadvantages of an owner-financing arrangement for both the home seller and potential buyer.

If you’re considering entering into an owner-financing arrangement for either the sale or purchase of a home, you need to do some research. Owner financing becomes more popular during slow markets, but still only represents a small fraction of all sales. This is due to a number of reasons: seller and buyers may not understand how owner financing works, are worried about entering into a financial agreement with a complete stranger, or haven’t researched how the arrangement might benefit them.

While owner financing can offer a number of benefits, there can be negatives as well. There are ways a seller can reduce their financial risk, but both buyers and sellers need to weigh the pros and the cons before entering into an owner-financing arrangement.

What are the advantages of owner financing?

Owner-financing arrangements offer a number of advantages for both sellers and buyers.

Sellers may have the advantage of:

  • receiving a higher-than-average price or interest rate, due to the buyer’s inability to obtain traditional financing,
  • receiving a tax advantage, thanks to the nature of owner financing where capital gains from the sale are spread out over time, and
  • a shorter closing period.

Buyers may have the advantage of:

  • obtaining more flexible credit requirements and loan terms (this can be especially advantageous if the buyer has poor credit or can’t prove income due to self-employment or a new job),
  • rebuilding their credit thanks to the regular monthly payments made to the seller,
  • paying a smaller down payment than what might be required with a traditional loan,
  • paying fewer closing costs, which could potentially save the buyer thousands of dollars, and
  • getting into the home faster by avoiding a lengthy loan process.

And both the seller and buyer benefit by having an alternative to close a deal that might not have been possible with traditional financing.

What are the disadvantages of owner financing?

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While the pros of owner financing might sounds great, there are some cons as well.

For the home seller, possible disadvantages of extending financing to a buyer include:

  • taking on the role of determining the best loan terms, which can be difficult if you’re not familiar with the financial industry,
  • deferring when total funds from the home sale will be received (owner-financing arrangements can be comparable to rental agreements), and
  • assuming the risk of the buyer defaulting on the loan.

There are possible disadvantages in an owner-financing arrangement for the potential buyer as well, such as:

  • paying a higher sales price or interest rate than what might be obtained with a traditional mortgage, and
  • the need to refinance the loan at the end of the term to pay off the balance, which means that the buyer will need to be able to qualify for a refinance at that time.

This article contains general information. Individual situations are unique; please, consult your financial advisor or attorney before utilizing any of the information contained in this article.

Source: Realtor.com, MortgageFit.com, Nolo.com, Associated Content, NuWireInvestor.com
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